Value, Risks and Benefits of ERP

Chapter 3
 ERP Systems Create Value
• Integrate the company’s activities
– All business functions can be integrated through the
use of shared data using a single system.
– ERP based on business process which cuts across all
business functions.
• Force the use of ‘best practices’
– ERP systems have inbuilt ‘best practices’ business
processes. Use of an ERP will force company’s to
change their ‘old’ business processes to ‘best
practice’.
• Enables organizational standardization
– A firm can standardize their processes in all their
locations both locally and globally.
– All reports and documents can be standardized.
• Eliminates information asymmetries
– All information is stored in a central database
which ensures accuracy, no duplication ,
availability and access to information to those
who needs it.
• Provides on time and real time information.
– In legacy systems, most information are captured
on paper and passed to another department
where it is keyed into a computer.
– For ERP, much information is captured at source
using technologies eg RFID or Bar code. The
information is therefore real time.
• Allows simultaneous access to data for planning and
control.
– ERP facilitates communication and collaboration between
different departments because the business process cuts
through many departments.
– Standardisation of processes also reduces conflict between
departments.
• Facilitates inter-organizational collaboration
– ERP allows communication and collaboration with other
companies.
– Many companies are opening up their databases to partners
to facilitate procurement and other functions.
 Benefits of ERP
• Information integration
• Reduction of lead time
– Time between placing an order and receiving the
product.
– ERP have an inventory management system that is
integrated with sales, purchasing, PPC and production
that ensures that orders received are quickly
processed.
– Use technologies like EDI and EFT to reduce lead
times.
• On time shipment
– Since information is available, management can
monitor available stock and the flow of materials
from supplier to customer and take corrective
actions if required to ensure the customer
receives their orders on time.
• Reduction in cycle time
– Order fulfilment and purchasing is automated
without human intervention.
• Improved resource utilisation
– ERP has capacity planning features that can help
create accurate and achievable production
schedules based on availability of capacity and
materials.
– Also have simulation capabilities that will help the
capacity and resource planners to simulate various
capacity and resource utilization scenarios and
utilise the best option.
• Better customer satisfaction
– Shorter lead time and on time shipment.
– Web enabled ERP allows customer to place order,
track the order and make payment from his home.
– Since the ERP system will have all the information
about a customer, the company can use this
information to give better service.
• Improved supplier performance
– ERP systems provide vendor management and procurement
support tools.
– Helps company to negotiate , monitor and control costs,
schedules, quality and performance.
• Reduced quality costs
– Specification control systems in ERP allows companies to
document specifications and enable an organization to
standardize and simplify its quality assurance and control
functions.
– ERP tools allow for implementing TQM programs.
• Better analysis and planning capabilities.
– ERP systems have decision support and simulation
tools to help management make better decisions.
• Improved information accuracy and decision
making capability.
– A centralised database in ERP ensures accurate
real time data which helps in decision making
• Use of latest technology
– ERP packages utilises the latest IT technologies
such as open systems, client/server technologies
etc.
– This utilization of the latest IT enables companies
to incorporate the latest technologies during the
system design and implementation of the
software in the company.
 Risks of ERP
• All application software projects involve risks.
• Managers must be able to understand and
manage the risks involved and have plans in
place to minimize the risks.
• How to minimize risks:
– Use a proven methodology for implementation
– Have a contingency plan for things that may go
wrong.
 ERP Disasters
• Hersey
– Spent $115 million to replace legacy system with
ERP system
– After 3 years, still many problems.
– In 1999, sales dropped by 12.4%
• Whirlpool
– Announce similar but less severe problems with
SAP implementation.
 Risk of ERP
• 3 major areas to manage :
– People issues
– Processes
– Technology
 People Issues
• People include employees, management,
implementation team, consultants and
vendors.
 People issues
• Main issues with people are :
– Change management
• ERP will change the way companies do business. Many jobs
will be automated.
• Old jobs will dissapear and new jobs created
• Managing these changes is difficult and if not done
properly will result in failure.
– Internal staff adequacy
• Implementation and maintenance of the ERP system
requires qualified staff. This may be difficult to find and
retain.
– Project Team
• ERP implementation is a very complex project
• The team must consist of consultants and internal staff
who are qualified, dedicated, have good team skills and
communication skills.
– Training
• Lack of training will result in not utilizing the full
capability of ERP and will increase resistance to change.
– Staffing ( Includes turnover)
• Operation and maintenance of ERP require skilled
personnel.
• Employee turnover during implementation and
transition stage can result in delays and cost over runs.
– Top management support
• Complex nature of ERP requires that top management
commit adequate resources and time towards the
success of the project.
– Consultants
• Consultants are experts in ERP implementation but may not be
familiar with the internal workings and culture and might create
trouble by not taking into account the needs of the organization.
• The company must assign a senior manager to act as a liason
between the consultant and the employees.
– Discipline
• The ERP project requires discipline from management and
employees. Procedures must be followed.
– Resistance to change
• Ignorance is one reason for resistance to change.
• Time and effort educating and training users will reduce
resistance.
 Process Risks
• ERP will introduce new business processes and
eliminate old processes.
• Managing the implementation of business
processes is a factor that will decide the
success of the ERP implementation.
 Process Risk
• Main areas of concern are :
– Program management
• ERP are transaction focussed and used to manage
commercial functions such as sales, production,
logistics, materials management etc.
• All companies require accurate information about their
programs and products. Some of this information is
captured by ERP but other information which is
important for program execution cannot be captured.
• Presently there is no program management link to ERP.
– BPR
• BPR means dramatic change and dramatic improvements.
• These changes can only be done overhauling the
organizational structure, management systems, job
descriptions and the use of IT.
• These changes if not managed properly can lead to
breakdown and failure.
– Stage Transition
• Stage transition means who is responsible after we go live.
• This have to be handled carefully since many employees
are involved in the implementation project. Once the
project goes live, the way roles change and how the
change is done can decide success of the project.
– Benefit Realization
• Implementing ERP and realising the benefits are two
different things.
• Implementation can be a success but operation must
also planned and organized properly with the support
of all people involved. Only then the benefits of ERP
can be realised.
• Factors for benefit realization are employee
participation, training, management support and
making full use of the capabilities of the system.
 Technological Risks
• Technology is advancing at a fast rate. ERP
packages usually incorporates the latest IT
technology.
• Companies that have implemented ERP
systems should keep up with the latest
technological development and implement
what is required to survive and utilise the
capabilities of ERP.
 Technological Risks
• Some of the technological risks are :
– Software functionality
• ERP systems offer many features and functions that can overwhelm
the users.
• Companies should only install features required.
• Implementing all the features is expensive and a recipe for disaster.
– Technological Obsolescence
• Technology will be obsolete after a few years . Same with ERP
systems.
• Management must select ERP systems that will not be obsolete
after a few years.
• Important factors to consider are ease of upgrading, quality of
vendor support, architecture of the product etc.
– Application Portfolio Management
• A typical IT dept spends most of its time maintaining its
inventory of software applications and hardware.
• If left unchecked, the IT dept will have no time and
capacity to deliver new products.
– Enhancements/Upgrades
• ERP systems have to be upgraded and kept up to date.
• Important factor here either the vendor close shop or
stop supporting the product.
• Care to be taken in selecting a suitable vendor and
support contracts should be signed to minimize risks